Reserve Bank governor Philip Lowe says it’s “possible” there will be further increases to interest rates, despite keeping them on hold at the last meeting.
The governor says it’s unclear if monetary policy has more work to do, and was “very conscious” the full force of the tightening to date had not yet been felt.
In a speech on Wednesday, Dr Lowe struck a relatively balanced tone in line with his statement issued after the July decision.
“It remains to be determined whether monetary policy has more work to do,” he said.
“It is possible that some further tightening will be required to return inflation to target within a reasonable timeframe.”
The board opted to keep the cash rate on hold at 4.1 per cent when it met on July 4.
This followed four percentage points of hikes since May 2022 aimed squarely at bringing inflation back within the two-three per cent target range.
“The board decided that, having already increased rates substantially, it was appropriate to hold interest rates steady this month and re-examine the situation next month.”
In his speech, Dr Lowe suggested the last few interest rate hikes in May and June may have been enough to counter a concerning spate of data that implied the central bank may struggle to return inflation to target by mid-2025, as expected.
“Data received since then had suggested that the inflation risks had shifted somewhat to the upside,” he said.
“The board responded to this shift in risk with a further lift in interest rates.”
He also laid out the “cross-currents” feeding into the inflation outlook.
Rising rents, higher electricity prices, strong unit labour costs – largely driven by sluggish productivity growth – and high levels of capacity utilisation were at the top of his worry list.
But he said several forces were working in the other direction, including normalising supply chains, easing commodity prices, and slowing growth in household consumption and overall demand.
“The slow growth in demand is expected to lead to some rise in unemployment and a moderation in growth in unit labour costs,” he explained.
“It is also expected to reduce cost pressures on firms and to lead to greater discounting than has been the case over recent times.”
An updated set of the RBA’s own economic forecasts, as well as fresh data on inflation, the labour market, household spending and the global economy, will inform the August call.
By Poppy Johnston in Canberra
